Why should I bother creating a budget?

By Ryan Barnes AAA
A:

Creating and using a budget is a valuable tool for all demographics; it's not just for those who need to closely monitor their cash flows from month to month because "money is tight". For people who earn enough income to cover their bills and have a regular monthly surplus, a budget can help maximize investment capital by earmarking regular allocations to investment vehicles such as retirement accounts, college education plans (such as Section 529 Plans) and personal investment accounts.

Now if one's monthly expenses typically consume up the lion's share of net income, any budget should focus on identifying and classifying all the expenses that occur during the month, quarter and year. Doing so will allow you to see when you should put sufficient money aside for those regular necessary expenditures (such as home and/or car insurance premiums).

Some goals for the person whose cash flow is tight can include identifying expenses that could be reduced or cut (such as entertainment and shopping), as well as minimizing any interest being paid on credit cards, home equity line of credit (HELOC), and the like. Interest costs eat away at spending money, and sometimes these costs can be minimized by determining a spending outline that takes the whole year into account. For instance, creating a regularly-funded "Christmas Club" could keep the credit card bills from spiking come December because there would be available cash on-hand.

Budgets are especially useful when a major life change is on the horizon, such as moving to a new home, having a child, or entering retirement. These situations generally bring shocks to any existing spending patterns, but good foresight into their costs and a good amount of savings provide the best chance to have the funds necessary to get through them smoothly.

There's also an inevitable psychological effect from creating a budget and laying all your expenses "on the table". Small purchases can and do add up, and many people find that just by looking at aggregate figures for discretionary spending, they are spurred to change their patterns and reduce excessive spending. Also, having a budget laid out in which all the anticipated expenses for the year are accounted for can be very satisfying - and can remove a large weight off your mind and shoulders.

For more information on creating a budget, check out Six Months To A Better Budget and The Beauty of Budgeting.

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